Weather market volatility at play

Highlights

  • The canola market is operating under conflicting weather issues
  • Estimating canola production potential this year is debatable due to the wide variability of crop conditions Prairie-wide
  • New crop 2017 Canadian canola production needs to be over 20 million tonnes just to hold carryout stable at tight levels for next year

Grain markets swirled wildly over the past two weeks. It's been a combination of conflicting variables associated with weather impact on new crop production, United States Department of Agriculture projections of still abundant U.S. and global grain/oilseed supplies and shifting currency relationships like the rising Canadian dollar.

Winnipeg canola futures ran up to test long-standing overhead chart resistance at $530 per tonne, then fell back to below psychological support at $500, and has since recovered again. Chart support extends from $500 down to last week’s sell-off low at $495. Overhead resistance remains firmly entrenched up at $530.

Immediate chart action remains negatively biased, but until we get an indication of some decent rains for southern and central areas of Saskatchewan, it’s hard to get too bearish.

While it is difficult to create a bullish supply narrative, price action sure acts like a market that has more upside potential.

Canola

The canola market is operating under conflicting weather issues. On one hand, canola prices remain supported by the recent heat stress being felt across much of Western Canada. However, conditions have cooled down to start this week on the western side of the Prairies, and forecasts call for rain later in the week.

Estimating canola production potential this year is quite a debate because of the wide variability of crop conditions Prairie-wide. But canola crop potential in North Dakota, a key U.S. state, and Australia is certainly deteriorating due to dryness.

Old crop

A big Canadian crop is undoubtedly needed. With the July 31 end of the old crop 2016-2017 marketing year in sight, demand remains strong for canola. The domestic crush is at a record high nine million tonnes for the year and exports also record high near 11 million tonnes (That’s total usage around 20.5 million tonnes when you add in seed and Feed-Waste-Dockage). That means old crop carry-out stocks at July 31 will be tight, probably in the area of only one to 1.25 million tonnes.

New crop

New crop 2017 Canadian canola production needs to be over 20 million tonnes just to hold carryout stable at tight levels for next year. That may become a challenge, so the canola market will have to work to ration some usage. Currently, canola prices are moderately expensive compared to soybeans, but more aggressive rationing is likely to be required at some point.

In the United States, the weather forecast continues to be of great interest as it simply isn’t enough either way to provide clear direction for the bulls or the bears of the market. Some rain and limited heat remain in the 16-day outlook for a sizeable portion of the midwest. That keeps the bulls in check. However, drier areas of the western corn belt may continue to miss out on good rains, while periodic heat is expected to continue. That keeps the bears in check for now.

The latest data from the Chicago corn and soybean futures shifts the speculative-managed fund position from net short to net long and increases the risk of fund selling should the weather outlook become more favourable moving forward.

The selling experienced late last week was evidence of this potential.

Soybeans

The price action in the soybean market remains stronger than popular trader sentiment imagined possible. Traders still find it difficult to be a bull on beans after we have been dealing with talk of large U.S. and world ending stocks for more than a year. Traders also still largely expect lofty 2017 U.S. soybean yields, despite plenty of anecdotal concerns from the country regarding condition of this year’s crop. While it's difficult to create a bullish supply narrative, price action sure acts like a market that has more upside potential.

Bottom Line

Canola and soybean markets continue to deal with several variables, from weather and production forecasts to global supplies and shifting currency values.  

Mike Jubinville of Pro Farmer Canada offers information on commodity markets and marketing strategies. Call 204-654-4290 or visit www.pfcanada.com to find out more about his services.